MARKET CHEERLEADERS LIVING IN FAIRYTOPIA

Back in March I got into a rather interesting e-mail discussion with one of the economists at Merrill Lynch (in New York). It came after I read one of their monthly newsletters, where the authors presented the world with what they thought was sound market analysis. It was garbage, and I let them know.

Well, hang on to your hats. We're now getting more and more of the same garbage, as you can see in this "It's Not the Government's Recovery" piece by Brian S. Westbury and Robert Stein. The authors do their level best to show the world that people in the bailed out financial sector (like them) know what they're doing when, in fact, they don't get it. In my view, they have no idea about cause and effect relationships when it comes to our current market environment.

Check this out.

The authors first claim that accounting gimmicks like "mark-to-market" - which allows the financial sector to reprice garbage - have made things better. And it did ... for market players on Wall Street.

What the authors don't mention is that the freedom to reprice their garbage came in the bailout language signed by President Bush after Newt Gingrich and the financial industry lobbied Congress extensively (here's what I think about mark-to-market), while others worked on FASB rules. This means that the federal government altered the rules for the industry to help revitalize collapsed market prices. There were no invisible hands here as the authors suggest.

Then the authors argue that "easy money and the the normal tendency for free markets to heal from panic" created the conditions for recovery. This is truly pathetic.

Look, I voted for President Obama and genuinely want him to succeed. But the recovery isn't real (no matter what Larry Summers says). Those of you who read this blog regularly know why. To the extent that things may have stabilized, the "easy money" policies (via low interest rates) that made this possible were mandated/facilitated by the Federal Reserve. This occurred with the cooperation of the White House and the Treasury Secretary. This is government policy.

Finally, the authors also hide behind industry junk terminology ("V-Shaped recovery", "monetary velocity," etc.) that, I'm sure, impresses gullible family members and drunk neighbors. But it does little more than camouflage reality. It completely misses the multi-trillion dollar guarantees that the Federal Reserve, the FDIC, and the Treasury Department created for Wall Street's market garbage. This along with mark-to-make believe are what is creating the illusion that things are picking up on Wall Street (by facilitating counterparty payoffs). 

At the end of the day, what Westbury and Stein present is stunningly superficial and myopic. It really belongs in the Irving Fisher School of Permanent Plateaus. More to the point, to suggest that markets are "healing" because of some kind of Magical Market Pixie Dust is simply delusional.

There's more from the authors (including the incredibly ignorant suggestion that the "economy would be doing even better ... if government had stayed out of the way") but it's clear that Westbury and Stein really have no clue what's happening in the economy. These guys are living in a free market fairytopia.

That they're writing this stuff, and people take them seriously, should be a Red Flag. They're cheeleaders, not analysts.

- Mark